European Central Bank Cuts Interest Rates to Fight Deflation Risk

The European Central Bank cut its interest rate to only 0.15% as a desperate attempt to boost economy.

The ECB announced Thursday the measures they will take to boost economy, which include cutting interest rates and providing affordable loans for businesses.

A 0.15% interest rate is a record low for ECB. Low inflation rates could easily eliminate the very slow recovery of the European economy. This could bring the economy to a steep downward trend.

ECB even cut its deposit rates from zero to a negative number. This is clearly one of it “do whatever it takes” move out of desperation, since this thing has never been done by any big central bank.

That move allows the ECB to charge banks for any deposit they put in the central bank. Theoretically, it will instead give an incentive to provide loans for consumers and firms.

Besides cutting costs, ECB will pump more money in the eurozone by giving banks new long-term loans, which they can use to increase the lending to companies and businesses. Berenberg economists claim that the total loan could reach up to 600 billion euros.

Europe’s economy depends on thousands of medium to small sized businesses and most of these businesses have no other financial source.

According to ECB President Mario Draghi said he has not seen any evidence of deflation in the eurozone, but the risk is high as inflation stays at significantly low levels.

Low inflation is very dangerous for any economy, because people may not be buying or investing, leading to a downward spiral, which could eventually result to deflation.

Societe Generale’s Kit Juckes said Draghi is using all his powers on Quantitative Easing to keep the economy intact, which will generally reflect in stronger asset prices

However, Draghi said it would take 9 to 12 months before the rate cuts and loans would have a positive impact to the economy.